Can Money Really Buy Happiness?

It can—depending on how you spend it and whom you spend it on. Here are 5 ways to get the most delight from your dollars.
July 3, 2015

Do you think that if you won the lottery, you would be happy? Think again. Over the past 10 years, strong research from the field of positive psychology has shown that, universally, money adds to our happiness only up to a point. That point depends on where you live and how many dependents you have, but most studies say it’s about $75,000 per household in the United States. After that, making more money doesn’t really contribute to our overall mood and life satisfaction.

In fact, some studies have shown that wealth can even impede our ability to savor life’s joys. In one experiment headed by Elizabeth Dunn, Ph.D., co-author with Michael Norton of Happy Money: The Science of Smarter Spending, hikers with more money who came across an unexpected waterfall on their path were less likely to jump in or even to stop for a moment to enjoy the beauty than hikers with lower incomes. “If you have a lot of money, you feel like you can get whatever you want, so you don’t need to savor every little morsel of pleasure that comes your way,” Dunn says.

These results don’t mean you should turn down a raise. But you can change how you think about money and how you can get the most out of what you earn, Dunn and Norton say. Because it’s not how much you have but what you do with it that counts. A slew of recent research, theirs included, shows us how to reap the most delight from our dollars.

1. Rethink your bonus.

In one study, Dunn and Norton approached people on the street and gave them either $5 or $20. Half of those lucky passersby were instructed to spend the money on themselves by 5 p.m. The other half were asked to spend it on others. A follow-up evening call found that the group who bought things for themselves did not report any change in their mood from before they received the cash. Those who spent the money on others (many bought coffee for strangers; some gave to the homeless; some purchased small gifts for nieces and nephews) experienced much happier moods, however. Interestingly, the amount of money had no bearing on their happiness.

“We all think that having money and buying things for ourselves will make us happy,” says Norton, a professor of business administration at Harvard Business School, “but we make notoriously bad predictions about what will make us happy. Retail therapy can make us feel good temporarily, but spending on others makes a big difference in our overall, long-term happiness.”

2. Keep giving.

Norton’s studies show that we’re happiest spending money on others when we can see the impact the gift has on someone: when your friend often wears the earrings you bought her, for example, or when your financial help allows someone in need to have her teeth repaired or get his car fixed. And while donating anonymously to an organization in another country may not give you the same mood boost, it will still bump up your life satisfaction more than if you held onto the money, Norton says.

3. Splurge on vacations.

While giving is great, you don’t have to become a monk to be happy. You can and should spend on yourself, too, beyond your basic needs. But while the stuff we typically buy for ourselves—new house, car, clothes, TV, gadgets—will give us a temporary thrill, it won’t contribute to our sense of life satisfaction.

What does? Spending on experiences. Thomas Gilovich, Ph.D., professor of psychology at Cornell University, has found—in several studies—that “when it comes to spending our disposable income, experiential purchases tend to make people happier than material purchases.” It makes rational sense: After all, when we’re 85, will we remember the family trip to Patagonia or the new fleece jacket we bought in preparation for it? Spending on experiences broadens our horizons, strengthens our connections and creates lasting memories.

But Gilovich’s research found a slightly less sentimental reason for the difference: When we buy material goods, we tend to compare our purchases unfavorably with all the other purchases we could have made and those that others have made. You select a new smartphone, for example, but soon regret not getting one with more memory. Or you save up for a new couch only to visit a friend’s home and feel that her sofa is more comfortable. We tend not to compare and regret as much when it comes to experiences, Gilovich says.

Finally, the psychological concept of hedonic adaptation—in which we quickly get used to new things and then want more—assures us that the enjoyment of a new car will fade even faster than that new-car smell. The concept of “rosy recollection,” however, in which we remember experiences as better than they were, means that the family vacay (you know, the one where your wallet was stolen, the kids were crazy and you all got sick) will seem better and better over the years.

Bottom line: Forgo the new living room furniture in favor of a baseball game with your daughter, a weekend trip with your spouse or a day at the amusement park with your friends.

4. Buy time.

When you make any purchase, think about the time tradeoff it entails, Norton says. If you’re tempted by a much larger house that is far from your work, for example, consider the effect of the commute. The hours you lose with your loved ones over time will have a bigger impact on your happiness than will the finished basement or the extra bedroom, he says. Conversely if the housing costs are higher near where you work, shop or go to school, the extra expense will likely be worth it in the long run, as long as you can afford it.

“People tell me all the time that they can’t afford a cleaning person, but then they spend a thousand or more dollars a year on coffee drinks,” Norton says. “The time you save on cleaning can be spent with friends and family, which makes it money better spent.”

5. Invest with impact.

The way you spend your money is a reflection of your core values, says G. Benjamin Bingham, author of Making Money Matter: Impact Investing to Change the World. If environmental and humanitarian responsibility are important to you, put your money where your mouth is. “Buying organic and fair-trade is more expensive, for example, but it may save you money in health care costs later on. And it will help create a more sustainable future for your grandchildren,” he says. Put your investment money into funds with companies you respect. (The Global Impact Investing Network, TheGIIn.org, can get you started.) “Invest in a future that you would love,” Bingham says.

Learn 7 surprisingly easy practices that can mold you into a more cheerful, appreciative, happy person. 

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